Tuesday, April 18, 2017

Defendant HSBC Bank USA, N.A., Admits Submitting Dozens of Loans for Payment on SBA Guarantees Without Disclosing that Loans Had Been Identified as Fraudulent or Potentially Fraudulent

Joon H. Kim, the Acting United States Attorney for the Southern District of New York, and Eric S. Benderson, the Acting General Counsel of the U.S. Small Business Administration (“SBA”), announced today that the United States has settled a civil fraud lawsuit against HSBC BANK USA, N.A. (“HSBC”). The Government’s complaint, filed on April 10, 2017 (the “Complaint”), sought damages and civil penalties under the False Claims Act for misconduct in connection with HSBC’s participation in the SBAExpress loan program, which was designed to help start-ups and existing small businesses. The Complaint alleged that, as part of an internal review designed to identify reasons for defaults on loans to small and medium-size enterprises, HSBC identified dozens of SBAExpress loans as fraudulent or potentially fraudulent, since borrowers appeared to have submitted false information to HSBC to obtain the loans. The Complaint further alleged that after 42 of these loans defaulted, HSBC sought reimbursement from the SBA without revealing the facts suggesting that borrowers submitted false information to HSBC to obtain many of the loans, or the fact that HSBC had included the loans on an internal list of fraudulent or potentially fraudulent loans. In the settlement approved today by U.S. District Judge Lorna G. Schofield, HSBC agreed to pay $2,118,861.36 to resolve the Government’s claims, and admitted, acknowledged, and accepted responsibility for conduct alleged in the Complaint.

Manhattan Acting U.S. Attorney Joon H. Kim said: “Lenders must disclose material information for our agency partners like the SBA, who administer federal loan programs. When they fail to do so – as HSBC did here, by submitting loans for repayment on SBA guarantees without disclosing that the loans had been identified as potentially fraudulent – they need to be held to account. This settlement reflects the Office’s continuing commitment to keep lenders who participate in federal lending programs honest.”

SBA Acting General Counsel Eric S. Benderson said: “This case is yet another example of the tremendous results achieved through the joint efforts of the SBA and the Department of Justice to uncover and forcefully respond to civil fraud committed by those who participate in SBA’s lending programs. Identifying and aggressively pursuing instances of civil fraud by participants in the Agency’s lending programs is one of SBA’s top priorities.”

The Government’s lawsuit alleged as follows:

In or around 2006, HSBC conducted an internal review to identify reasons for the default rates on loans it had made to small and medium-size enterprises, including but not limited to loans issued pursuant to SBAExpress. HSBC created a list of known fraud accounts as part of the review. HSBC identified many SBAExpress loans as fraudulent or potentially fraudulent in which borrowers may have submitted false information to HSBC in obtaining their loans, including 42 loans (the “Loans”) referenced in an exhibit attached to the Complaint.

After the Loans defaulted, HSBC sought reimbursement from SBA for the guaranteed amount on each of these Loans (up to 50 percent of the principal of the Loans) without telling SBA that many of the Loans were fraudulent or potentially fraudulent. Specifically, HSBC did not inform SBA of all of the facts indicating that borrowers may have submitted false information to HSBC in connection with the origination of many of the Loans, or that HSBC had included these Loans on an internal list of fraudulent or potentially fraudulent loans. HSBC’s failure to disclose that it had determined that many of the Loans were fraudulent or potentially fraudulent rendered HSBC’s reimbursement requests for losses incurred in connection with the Loans false, misleading, and/or fraudulent. The submissions made to SBA in connection with seeking reimbursement on many of these Loans contained half-truths and material omissions by failing to disclose facts about fraud or potential fraud by borrowers when the Loans were originated.

The case was initially brought by a whistleblower under the False Claims Act, and the Government intervened in the case.

Pursuant to the settlement, HSBC will pay the United States $2,118,861.36. As part of the settlement, the bank admitted, acknowledged, and accepted responsibility for the following conduct:

In or around 2006, HSBC voluntarily commenced an internal effort to gain an understanding of the reasons for the default rates on loans that it had made to small and medium-size enterprises, including but not limited to loans issued pursuant to the SBAExpress program. HSBC’s efforts included an attempt to identify whether any of the loans involved fraud or potential fraud by borrowers;

As part of this effort, HSBC identified a number of loans as fraudulent or potentially fraudulent in which borrowers may have submitted false information to HSBC in obtaining their loans, including the Loans;

HSBC subsequently sought from SBA the guaranteed amounts on each of these Loans (i.e., up to fifty percent of the principal of the Loans) after the loans defaulted;

In submitting the requests for payment to SBA of the guaranteed amounts of certain Loans, HSBC did not inform SBA of all of the facts indicating that borrowers may have submitted false information to HSBC in connection with the origination of these loans, or that as a result HSBC had identified these loans as fraudulent or potentially fraudulent.

Mr. Kim thanked SBA for its investigative efforts and assistance with the case.